Every four years, as the debates heat up in the US presidential race, there is a coinciding busy time in Australia's economic calendar.

I am talking about the work we do each year to update the budget in the Mid-Year Economic and Fiscal Outlook.

This is often seen as a simple tallying exercise - a poorer cousin to the budget - and in past years this might have been so.

More recently it has become another opportunity to reflect on our priorities and values. It is a reminder the society we create is not just a reflection of our own headline debates, but also the institutions we build and the cumulative impact of many seemingly small decisions of government. Who we are is not just about how we spend our wealth, but about the framework for its creation.

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Extreme inequality is not an inevitable outcome of wealth creation, and it carries a high price for us all. This idea lies at the heart of the American economist Joseph Stiglitz's latest book, The Price of Inequality. Stiglitz laments that the US has surrendered much of its civil society to vested interests: a choice that stifles the lives of the poor but also risks the future prosperity of all.

In my essay ''The 0.01 Per Cent'' in The Monthly, I drew a sharp distinction between Australia and the US; in his book, Stiglitz portrays an inequality I would never want repeated here. Far from trickling down, about 60 per cent of the US's income growth over the past three decades flowed to the top 1 per cent. Average wages have stagnated, and the recession has made matters only worse for those left in the wake of long-forgotten booms who feel that, far from being the aggressors, they have become targets in a class war, or at least its collateral damage.

More concerning for Stiglitz is the slow strangulation of the American Dream. The mobility most Americans believe in is fading from reality. Your parents' income has more influence on your life chances in the US than in most other developed countries. Stiglitz, who is among those seeing the dream slip away, senses a growing disillusionment, a sense that the social contract is broken.

He argues that this inequality ''didn't just happen''. It is not simply market forces at work - much is a result of policies that have shaped the market in ways that advantage the very wealthy at the expense of the rest. It is a form of redistribution, although it rarely goes by that name.

Of course, market and social forces play a role in growing inequality. But in the US, the top 1 per cent increasingly reaps the rewards of wealth transfers rather than wealth creation - their wealth reflects their ability to extract it from consumers, shareholders and taxpayers, rather than actually create it.

Stiglitz is for wealth creation, but fears that it is too frequently confused with wealth transfers that are the worst form of redistribution. There are many ways this can come about. Governments can sell natural resources too cheaply or buy medicines for too high a price. And they can favour particular interests in setting and enforcing the ''rules of the game'' meant to ensure a competitive marketplace.

The warning in The Price of Inequality is that this is not just unfair but inefficient. Stiglitz sees a form of inequality in the US that diverts the top from true wealth creation and deprives the bottom of the opportunity to participate in it.

At the bottom, talent withers. Schools are neglected in favour of tax cuts for those who hardly need them, and the rules regarding student loans foster exploitation as much as education. At the top, talented people fight to acquire wealth rather than create it. Vast resources are wasted on unduly influencing governments, regulators and courts.

It is clear that Australia stands well in comparison. In recent times, attention has been on our reforms to secure a better return on the resources owned by all Australians, but Stiglitz's book is an opportune reminder of the wider range of policy areas that also count.

In balancing the budget, the Gillard government has made sensible spending cuts while winding back inefficient tax concessions. We have balanced fiscal discipline with continuing investments in people through reforms in skills and education, a National Broadband Network and the National Disability Insurance Scheme.

Our reforms have not just been about a better deal for taxpayers. Banking reforms fostering competition and transparency have ensured a better deal for consumers. And we have empowered shareholders to help tame executive pay in the companies they themselves own.

We'll build on this legacy in the Mid-Year Economic and Fiscal Outlook - projecting our values onto the bottom line by taking sensible savings that do everything possible to protect jobs and help pave the way for classic Labor reforms. Reforms that expand opportunity and build a fairer, more productive society. A wealthier society.

Of course, Australia's good standing is due not just to governments but also the strength of our people and social contract. We accept the need for well-regulated banks and sound competition and consumer protections. There has been a willingness among some of the most successful Australians to put the nation's interests before their own. My concern in recent years has been to speak out when this nation-building patriotism is being eroded.

Stiglitz fears for the US's social contract. He observes how business schools teach students to exploit the failings of the market, rather than being its champions. Among some of the top 1 per cent there is a growing sense of entitlement, a belief that what they can extract from shareholders, consumers and taxpayers, they deserve.

Worryingly, vested interests have convinced much of the 99 per cent of their agenda. There are spreading beliefs that more equality means less efficiency, that governments fail but markets do not, and that corporate welfare creates wealth and social welfare destroys it. Far from being harmless, these nonsensical beliefs skew debates in favour of a few, derailing attempts to create a more dynamic, prosperous society.

Stiglitz is well placed to expose these myths. His Nobel Prize-winning work shows how common market imperfections are; it's not a matter of whether they exist, but whether we can do something about them. He has also faced these misplaced beliefs as a policymaker. As Stiglitz recounts, in helping balance the Clinton budget he could hardly dent corporate welfare as that would have been ''class warfare''.

At the outset of his book, Stiglitz finds hope in the Occupy Wall Street protests; hope that Americans are waking up to how the rules of the game are tilted against them. But, as it draws to a close, he hits upon the better bet for rebuilding the American Dream: he hopes at least some of the 1 per cent will see it is in their interests to start down the path of reform. To promote a truly competitive marketplace, where true wealth creation is everyone's aim and within everyone's reach. My view is more optimistic. The US has seen such inequality before, only to pull back from the precipice. For our part, we will keep building an economy and a society that empower all Australians to be wealth creators, giving all of us a more prosperous future, not just a fortunate few.

Wayne Swan is the Deputy Prime Minister and Treasurer.

The Price of Inequality by Joseph Stiglitz is published by Allen Lane ($39.99).